Perspectives on Economics, Freedom, Liberty, Development & Change

The term capital flight has been given many interpretations in the economic literature and in the press, leading to confusion and misinterpretations. In the popular press, capital flight is presented as illegal or illicit financial flows. It is housed in the same domain as money laundering, tax evasion, transfer pricing, underground trafficking. Yet, while these activities are illicit, not all of them amount to capital flight. At the same time, while most capital flight may be deemed illicit. Capital flight may be illicit in one of three ways: when it consists of money acquired illegally and transferred abroad; when funds are transferred abroad illicitly by violating capital account regulations; when capital is hidden abroad and therefore not being subject to taxation and other government regulations. It is not possible to make this determination a priori from the data that is used to calculate capital flight, which involves a reconciliation of recorded capital inflows (mainly external borrowing and foreign direct investment) and the use of these resources (to cover the current account deficit and accumulation of reserves). The term capital flight means capital flows from a country that are not recorded in the country’s Balance of Payments (BoP). If all the ransactions were correctly and systematically recorded, inflows would balance out with outflows, except for small and random statistical errors as recorded in the ‘net errors and omissions’ line of the BoP. Where large discrepancies are observed, in other words, where there is substantial ‘missing money’ in the BoP, this is taken as an indication of the presence of capital flight.

Ethiopia’s capital flight is estimated at US$24.9 billion or 83.8% of the GDP

(Source: Political Economy Research Institute, the University of Massachusetts).

August 17, 2014 (PERI Research) — Ethiopia’s capital flight is estimated at about US$24.9 billion which is 83.8% of the country’s Gross Domestic Product (GDP). Ethiopia is ranked 8th in the group of 33 countries for which data are available but it stands first when compared to non-oil and/or mineral exporting countries. Even the latter was considered to be substantially lower than the actual flows give that large stock of immigrants. The true figure could be as high as one billion dollars. If so, Ethiopian capital flight would be commensurately larger than the estimated.

Capital losses through trade misinvoicing and unrecorded remittance
Substantial export underinvoicning (net outflows) couple with import underinvoicing (net inflows), with the balance resulting in a net outflow, as in the case of Sudan or a net inflow, as in the cases of Ethiopia and Ghana.

Unrecoreded remittances also contribute substantially to estimated capital flight in some countries. In Ethiopia, the volume of remittances reported by the World Bank in 2010 was about half the amount reported by the Central Bank ($661 million).

The following figures are in millions

(Source: Political Economy Research Institute, the University of Massachusetts).